Gross wages have been growing faster than net wages for some time now - why?

Croatia is no longer approaching the European average in terms of real income per capita. Since 2024, we have stood at 78% of the EU average. In economic terms, real convergence has stopped.

There is a large gap in real income per capita between the richest and poorest countries, and then statisticians calculate a middle or average. We are almost a quarter below that average. So, much closer to the poorest than to the rich.

The Croatian economy is entering a new phase in which inflationary pressures, still solid personal consumption, but also a cooling of the labor market and a slowdown in wage growth are intertwined. Is this a small alarm bell or will the World Cup and the tourist season even everything out?

Economic analyst Velimir Šonje told Croatian Television that inflation in Croatia is 5.4% and 5.8%, respectively, which is significantly higher than before.

This is related to the fuel price shock, which has increased by approximately 10% since the start of the war in Iran, and to the fact that the share of fuel and transport consumption in Croatia in the consumer basket is somewhat higher than the euro area average.

“The fact that inflation was higher even before,” Šonje explained, “is a consequence of the extremely rapid growth of personal consumption and wages, which was particularly exceptional in 2021 and 2022.”

Will food become much more expensive? Will it significantly push inflation up?

“The relationship is approximately: when oil goes up by 10%, food prices on the world market go up by approximately 1.5% with a time lag of several months. We are only two months into the new inflation wave, so far we have not yet seen that effect. The World Food Organization's data for April shows a certain shift. In March, food grew slightly below 1% on an annual basis, now it has reached 2%. I think it will continue to increase,” he said.

We do not see the effect on retail prices yet, but it is possible that it will not be very strong.

“However, demand is slightly compressed throughout the EU, and this could be a factor that will prevent prices from rising as they did in 2021,” said Šonje.

Gross wage growth higher than net wage growth

Wages continue to grow, but their dynamics are gradually slowing down. And very importantly: gross wage growth is higher than net wage growth.

Gross wages have been growing 1 to 2 percentage points faster than net wages for some time now. What is the difference between gross and net wages? These are social contributions for pension and income tax. In the income tax system, we have something called a personal allowance, it amounts to 600 euros. So, it is a non-taxable part and these 600 euros have been stable for a long time. The result is that salaries that were not previously taxable by income tax, for example minimum wages, now fall into the tax bracket and you pay some 50-60 euros in income tax even on the minimum wage, which is the income of local governments, cities and municipalities.

Šonje emphasized that the state, or rather the local government, which collects income tax in its entirety, specifically benefits.

Personal consumption remains strong

Data on fiscalization and retail trade volume show that personal consumption is still strong.

“The latest data from the Croatian Bureau of Statistics shows a 3.1% growth in real terms after eliminating inflation. This is data for March compared to March last year. We do not have it for April yet, but we do have data from the fiscalization system that did not grow particularly. They are somewhere around 5-6% when we talk about fiscalization in retail trade, excluding car purchases and such. So, a certain slowdown is visible. For now, it is not yet clear how much of this is a consequence of prices and how much of it is a consequence of a real slowdown. In May, we will only see the real picture,” said Šonje, adding that he expects a certain slowdown, but it will be far from a crisis.

Revenues in the hospitality industry are growing, which Šonje emphasizes is a good sign.

The state charges three cents less per liter of fuel

Slovenia and Croatia have the largest increase in fuel prices at gas stations in the EU since the start of the war in the Middle East.

“Slovakia is first, and we are among those at the top. The government is not lying when it says: "we have relieved". They have reduced excise duties. The state takes three cents less per liter, but it still takes 47% of the retail price. So, if you pay 1.75 euros per liter of any fuel at the pump, always keep in mind that 46-47% of that goes to the state. Why was this growth, despite this relief, so large? It was large because of input prices,” explained Šonje.

Why are service prices growing so much?

The growth in service prices has been very rigid and constant for some time. Services are growing by 6 to 8% per year. When we look at their contribution to the consumer basket, or price index, services generate 2.3 percentage points of annual inflation.

“Prices can only grow when there is strong demand. There is no technological progress in services. So, services are responding strongly to demand and that is a signal that demand is still strong, but given its slowdown, I do not expect further pressure from services. On the contrary, I expect that service prices will slowly, I will not say stabilize, but slow down so that they contribute perhaps even less than 2% towards the second half of the year,” said Šonje.

Source: HRT